The following story by David Sirota at PandoDaily is simply excellent. It zeros in on the secretive and rapidly expanding relationship between private equity firms and the public pensions that invest in them. It shows a crony capitalist love affair greased by lobbyist influence peddlers known as “placement agents”, as well as non-public agreements between PE firms and public pensions chock full of conflicts of interest, extremely high fees and underperformance. Unbelievably, in many instances the trustees of the public pensions are not allowed to know what funds the “fund of funds” invest in. This makes due diligence impossible, and in one particularly egregious example it led the Kentucky Retirement Systems to unknowingly invest in SAC Capital despite the fact it was under SEC investigation at the time.

Furthermore, with the Wall Street Journal reporting back in 2011 that $37 of every $100 dollars invested in Blackstone’s investment pool comes from state and local pension plans, it appears that taxpayers are once again being fleeced by the financial oligarch class. Additionally, it appears to answer a recent question I posed in my piece: Is the Credit Bubble Popping? Carlyle Group Warns on Frothiness and Junk Bond Deals Get Pulled. After reading about a growing pool of insane “dividend deals” and payment-in-kind” notes being issued, I wondered who in their right mind was buying these deals. Well, based on the complete lack of competence and due diligence happening at public pension funds, I think we have solved part of the mystery.

The chief villain in this article will be no stranger to readers of this site. It is Blackstone, the private equity giant who I have criticized many times on these pages for buying up homes all across America in “all cash” deals, making homes unaffordable to average American peasants. Of course, Blackstone is just one of many, but given its size and influence, highlighting its practices is probably quite representative.

Here are some excerpts from the article. Read it and weep:

When you think of the term “public pension fund,” you probably imagine hyper-cautious investment strategies kept in check by no-nonsense fiduciary laws.

But you probably shouldn’t.

An increasing number of those pension funds are being stealthily diverted into high-fee, high-risk “alternative investments” that deliver spectacular rewards for the Wall Street firms paid to manage them – but not such great returns for pensioners and taxpayers.

And yet… despite the fact that they deal with the expenditure of taxpayer money, the agreements between public pension systems and alternative investment firms are almost entirely secret.

Until now.

Thanks to confidential documents exclusively obtained by Pando, we can now see some of the language and fee structures in the agreements between the “alternative investment” industry and major public pension funds. Taken together, the documents raise serious questions about whether the government employees, trustees and politicians overseeing major public pension funds are shirking their fiduciary responsibilities under the law when they are cementing “alternative” investment deals.

The documents provided by Tobe (embedded below) specifically detail Kentucky’s dealings with Blackstone – a giant Wall Street investment firm which has deployed a platoon of registered lobbyists in Kentucky and whose employees are major financial backers of Kentucky U.S. Sen. Mitch McConnell (R).

The Blackstone-related documents, though, don’t just tell a story about public pensions in Kentucky. The firm, which just reported record earnings, does business with states and localities across the country. The Wall Street Journal reports that “about $37 of every $100 of Blackstone’s $111 billion investment pool comes from state and local pension plans.”

In other documents, public pension money is exempted from some of the most basic protections usually guaranteed under federal law. Other contract language appears to license Blackstone to engage in financial conflicts of interests that could harm investors.

Despite the documents involving government agencies, and taxpayer money, they are all marked confidential. The public is not allowed to see them.

One of those documents given to Pando by Tobe is a confidential memo to KRS investment committee members from August 2011. In the memo, KRS staff outlines their desire to invest roughly $400 million in Blackstone’s Alternative Asset Management Fund (BAAM), which is a so-called “fund of hedge funds.”

As documented on page seven of that memo, Blackstone was guaranteed whopping fees of 50 basis points plus 10 percent of any overall profits on retirees’ money. In addition, the memo estimates 1.62 percent management fees and 19.78% incentive fees to be paid on top of the Blackstone fees to the underlying (and undisclosed) individual hedge fund managers in the “fund of funds.”

In 2013, according to KRS data, BAAM earned an 11.54 percent return for the pension system. That was 20 percent below the S&P 500 that year, meaning, Tobe says, that Kentucky taxpayers would have earned $78 million more in an almost fee-less S&P index fund.Those figures are consistent with a recent study from the Maryland Public Policy Institute showing “that state pension systems that pay the most for Wall Street money management get some of the worst investment returns.”

Fees, says Tobe, are a driver of the underperformance. Using the secret memo’s figures, Tobe estimates that 33 percent of that stunning one-year underperformance - or about $25 million – was in the form of fees paid to Blackstone and the other managers in its “fund of funds.”

According to data from the investment research firm Prequin, 20 others public pension funds are also invested in BAAM. Assuming those funds invested in BAAM under roughly the same terms as Kentucky, Tobe estimates that Blackstone and underlying managers in BAAM raked in well over $200 million in fees in 2013 on just that one fund of funds.

Absent from the memo to the trustees are any details about which particular hedge funds are in the BAAM fund. In an interview with Pando, Tobe argues that was by design because, he says, Kentucky officials wanted trustees to vote on the investment without being able to do due diligence. Tobe says that meant trustees were not made aware that BAAM invested in SAC Capital – the firm whose executives recently pled guilty to insider trading charges, and who at the time of the Kentucky investment were already under SEC investigation.

Amazingly, while asking public pension trustees to invest money in the fund, the Blackstone document also says that “none of the Partnership’s investments have been identified,” meaning trustees could not even evaluate the underlying investments before they decided to invest retirees’ nest eggs.

In terms of legal protections, the document says investments made by the private equity fund could be illiquid “for a number of years.” In a section marked “absence of regulatory oversight,” the document also says investors “are not afforded the protections of the 1940 (Investment Advisers) Act.” It also says that in the event of litigation brought against the managers of the fund, those costs “would be payable from the assets” of the investors.

Another section declares that “Blackstone may have conflicting loyalties” between the different funds it operates, and that “actions may be taken for the Other Blackstone Funds that are adverse” to investors.

These people have zero shame.

According to former SEC investigator Ted Siedle, who served as counsel to Tobe during the SEC investigation, the conflict-of-interest section marked “Fees for Services” is particularly problematic. He says it permits private equity managers to assess fees on companies the private equity fund owns, but then not compensate the fund investors (like public pensions) for those fees. This stealth fee-inflating practice, which is attracting SEC scrutiny, has been called the “crack cocaine of the private equity industry.”

In recent months, questions have been raised about why pension funds are investing so heavily in high-fee, high-risk alternative investments. For example, a New York Times report recently noted that “a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better” than those investing heavily in alternatives. Similarly, Bloomberg News reported that “more than half of about 400 private-equity firms that SEC staff have examined have charged unjustified fees and expenses without notifying investors” of such fees.

When Pando asked for specific comment on whether agreements between Wall Street firms and taxpayer-backed public pensions should be available to the public, Rose said: “We are going to decline to comment on this.” Likewise, the Private Equity Growth Capital Council and KRS did not respond to questions about secrecy.

That response – or lack thereof – highlights how public pension transactions with Wall Street remain shrouded in secrecy in states throughout the country. As Susan Webber has written, despite the astronomical sums of taxpayer money and retirement income at stake, “public pension funds routinely turn down requests” for such basic information in hopes of shielding the fee bonanza from scrutiny.

For example, following SEC warnings of fee abuse in private equity investments, the New York state’s Teachers’ Retirement System flatly rejected Reuters’ open-records request for information about its private equity holdings.

Additionally, I also suggest reading this article from today’s Wall Street Journal, Borrowing Cash to Buy Complex Assets Is In Vogue Again, showing how banks are increasingly offering massive leverage to hedge funds so that they will invest in risky assets the banks are no longer able to hold. Ultimately, public pension funds will turn around and invest in these hedge funds and the typical cycle of putting all the risk on the taxpayer and total muppet fleecing will have once run full circle. Incredible.

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Want to shut up a US endowment fund when they start talking down to you on fees or your corp. ROAC? Ask them how much they lost on US structured finance in 2008. Now ask them how much of their current portfolio is in SIF's and how has their policy changed or mark-to-market adapted post 2008.

Nothing changed. Seriously. Nothing. They have so much obligations and cash outflows that 10%+ AA bonds are the only thing many are qualified to invest in.

1.) This is nothing new. Been business as normal with Public Pension Funds forever.They're milk cows for everybody at the expense of the taxpayers.2.) This is another "reason" the Government will make to Nationalize Pension Funds.3.) Note the author is Liberal/Progressive ref. above point #2

I spent a few weeks of CQB training there a few years back, and those guys have some good training. I'm not defending everything they've done, but there are a lot of oath keepers there. There is no reason to fear some army of mercenaries like them. If therr ever was a real SHTF scenario, those guys are going to be defending their homes and families, same as the rest of us. And what does any of that have to do with this article?

Carl makes absolute sense; there is no need to fear a man who takes silver to kill and maim other human beings. Stuttering carbines, grenade blasts, the acrid smoke from cordite and burning flesh - hey, they've a job to do just like you.

Salt of the Earth, really.

If you cannot count on the loyalty, humanity and compassion of men who would convert you and everyone you love into small piles of smoking meat for a pile of fiat, what is there left to believe in?

The interesting thing is the incredible similarities between the rise of the SA in Germany and groups like the Oath Keepers in the US - right down to fighting with competing militia groups.

And then there's the paranoia, they claimed recently to have 'reliable information' that eric holder had authorized a drone strike on their operations at the bundy ranch. Anyone above the age of ten buying into the idea of the US droning American citizens in Nevada out of the blue... well that be some seriously questionable brain functioning and judgement!

Yes! CNBS 'xperts' will agree that the greed of the pensioners led them to invest with the thieves! And therefore they deserve to be fleeced. Oh and by the way, morons deserve to lose in the Darwinian struggle against princes of darkpoolness. Heads u lose tails I win!

Something like 80% of the comments I've read have been from people saying things like,"Good! I'm tired of working every day so these deadbeats can retire at 50 on my dime!" Alot of them were downright gloating...I can't see it as a 'meme', I'm sorry. I've seen it, it made an impression on me.

Exactly, it's money those people were told was going to be saved in trust in a community venture to invest their collected pool of money. The theory goes the larger the pile of money, the more diverse the investment base that can be developed. It sounds great on paper. Makes a great 'investment' advice column. Sells alot of bonds, CD's, mutual funds...sells a lot of paper that isn't ever going to be paid back because the system would collapse the same day.

There are only two things that a big pile of other people's money attracts.

Thieves and Taxmen, today though no one could tell the difference between the two since they seem to be having a great time lending on another other people's money. Worst yet...not putting it back. My favorite jacking inflation to cover the loss by handing less value back to someone that's busted their ass for decades. It's so amazingly broken and crooked, once the math hits a 'number' then it self destructs one of two ways.

1) too many people withdrawl at once. (remember rrsp's are 'stagard' pay outs, the can pay three card monte as long as there are suckers at the table)

2) too much money in the money supply and the 'million dollar' cushion is worth the same as a fist full of lint.

There's just no escape hatch to the current financial system that I've noticed. Only people left they can steal from is each other.

So get the popcorn. Show's just about to start. ( I strongly suggest not being the last guy to clean out their retirement account, historically never works out well )

20 years ago the professional banking crowd that cheered people on into 401k's and RRSP's like cattle. Today the same banks help "cyprus" their clients. So if it ain't heavy metal or crypto, and in your hand, you ain't getting it back. That's the underlying message in all those articles. No one is getting it back. I hate to say it, but you've all been robbed and thanked the thieves for their services.

And weirdly, even with the news, gave them more money because of an illusionary tax break around contributions to the free floating untaxed slush funds. Additionally they don't have to be reported on.

Remember it's a yearly estimate, the nice man in the suit at the bank told you that and buried in that brick of paper to start your 'registered plan' it says it as well. They don't have to tell you a damn thing until you withdraw your funds. That btw is how Madoff pulled the wool over the eyes of his investors. He did it by 'estimate'...until he didn't have any more money. Took a while to find out though didn't it?

Only way anyone with a 401k or an RRSP will know is until they fill out a brick of paper work to receive it in their hand. Until then everyone receives a free "Madoff-like" news letter from governments, investment companies and banks reassuring them of the solvency of their 401k or RRSP. That somehow it's safer because of a news letter or a cheap ad to 'bank with us'.

It's all a scam, has been from the start.

Q: How do you get money, untaxed back into a fixed pool of investments of the companies you and your friends own exclusively?

A: You convince people that the money they made is worth more in someone else's hands off the books, because that's the definition of off book accounting. You hide money in escrow and there's no need to report operational costs, because it's 'registered' therefore 'safe'. Like a savings account magically became worthless since the government got to hold the bag. (how well does that work out historically?)

Anycase, it all sounds pretty stupid doesn't it?

Yet people throw money hand over fist that they will never see again into them. Because the nice man in the suit at the bank said it would be there by the given estimate. Ask any ex-nortel employee, or DEC employee, or HP, or Ford...or whoever. Every piggy bank looted. Every last one. These are no different, it's just paper agreements that don't mean anything to anyone taking care of anyone's money.

this article illustrates why the fed is putting hedge funds out of business with SPY. How can the fed successfully transmit the wealth effect if they pump up the S&P 30% and fucking blackstone underperforms it by 67% and takes half of what they made in profits. what a fucking waste. The pension fund fiduciary's should be put in jail for selling out for a steak dinner and tixx to a ballgame and blackstone needs to gtfo of the way of spy which could be had for 20bps. This article is the best commercial ever for MYRA 2.0 which is 60% spy and 40% tlt with a guaranteed 8% rate of return backed by kevin henry.

Blackstone's strategy is much better than trying to laundry drug money. It also goes a long way to explain why the rich want to raise taxes. By paying taxes they legally get to keep half of the taxpayers money they steal.